Retirement Planner: There're no guarantees in stock market

The financial industry is filling the world with a plethora of products that involve guaranteed returns in a variety of shapes and sizes. Starting with annuities that guarantee a monthly lifetime income, there are a number of new inventions that offer protection against falling stock markets -- products that guarantee, for example, that we will "always get back at least what we had invested originally."

The genius of these guaranteed products lies in the variety of ways that they obscure the huge commissions and opportunity costs that virtually all of them impose on investors duped by fear mongering. They all beg the question, "Where are the customers' yachts?"

Let's look at what these products are protecting us against by considering the past 39 years, beginning in 1975. The S&P 500 index, which represents about 70 percent of the entire value of the stock market, has lost more than 20 percent of its value for just two of those years -- in 2002 and 2008. The same market earned more than 20 percent (including dividends) in 17 of those 34 years -- or 44 percent of the years people were invested they made a killing. For anyone who would lose sleep over even a 10 percent loss, we can add just one more year, 2001, when the market dropped 12 percent for the year.

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Within the year, of course, some market downdrafts have been more severe than these numbers indicate, but the "snapback effect" has an opportunity to correct the problem if given enough time before the end of a year. Actually, within this 39-year time period, we've had eight major crashes with the market losing more than 20 percent, but the average recovery from the bottom of each crash has been 39 percent, and 20 percentage points of that 39 percent has taken place within the first four to six weeks.

This helps to explain why, on an annual basis, market values have held up as well as the numbers indicate. For example, in 1987, the market dropped more than 20 percent in a single day, but the return for the year was a plus 5 percent. These statistics all apply to a portfolio 100 percent committed to stocks.

With about half the money in bonds, the numbers look even safer. Just six years produced any losses at all, and five of those loss years would have been for less than 5 percent. The total average annual return would have been about 7.5 percent.

Similar metrics can be applied further back in time, and anyone betting that the future will be much different is betting against history. So, you should question anyone suggesting a product that will cost you a lot of money, or prompt you to give up what could have been substantial gains (known as an "opportunity cost") -- all for just the dubious benefit of avoiding temporary losses. Without reviewing the vast collection of guaranteed investment products, we can see from these numbers that those that guarantee some minimal average annual return, that cap the gains at 15 percent, or that match the S&P 500 minus the re-invested dividend, are just raking in what could have been yours.

Moreover, guarantees are only as good as the organization making them. Several insurance companies were facing collapse just a few years ago along with Merrill Lynch and other major financial institutions that were manufacturing these guaranteed products. Doing your own thing directly with stock and bond index funds that charge less than one-tenth of 1 percent per year in fees puts you directly in the driver's seat. By comparison, guaranteed products leave you one step removed with the insurance company or a vulnerable financial institution between you and your real money.